Is Tax Avoidance Immoral? A Catholic Lay Perspective

Abstract: No matter how many tax scandals are revealed in the media – and there have been many in the past year, involving a diverse set of taxpayers ranging from Donald Trump to Apple – what is most remarkable is that, by and large, the public has considered them relatively non-scandalous. This was not always the case. During the 1930s, even the most innocuous tax avoidance maneuvers, such as buying tax-exempt bonds, were attacked as morally suspect. When did that change and why? This Article offers a novel attempt to gauge the respectability of tax avoidance – using a unique, hand-collected dataset of newspaper advertisements for tax planning services in prominent national papers between 1930 and 1970 – and concludes that a shift occurred after World War II. The Article then explains the reason for this shift, suggesting that a combination of extremely high rates, a broadened base of taxpayers subject to that rate, and a deterioration of the wartime consensus for the rate structure laid the foundation for the respectability of tax avoidance in the 1950s and 1960s. In effect, just as the high wartime rates for the wealthy had been justified as a means of compensating for the sacrifice of the poor during the war, the pursuit, and tacit approval, of tax avoidance after the war was a means of compensating for the high rates at a time when the sacrifice rationale for them had ceased to be compelling. This history parallels the modern experience with corporate tax shelters and has lessons for those seeking to reform the current tax system.

I had always taken for granted that Judge Learned Hand's view was (and had been) the prevailing one:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Gregory v. Helvering, 69 F.2d 809, 810-11 (2d Cir. 1934).

As Bank demonstrates, however, this was not always the case:

During the 1930s, even the use of perfectly legal provisions for reducing income taxes was attacked as morally suspect. There was public outrage when J.P. Morgan and his partners disclosed during the so-called Pecora Hearings – an investigation into the causes of the Wall Street crash and Depression led by the chief counsel of the Senate Committee on Banking and Currency, Ferdinand Pecora – that none of them had paid any income taxes in 1931 and 1932 because of their deduction of capital losses incurred during the crash. In 1936, Treasury Secretary Henry Morganthau characterized even the purchase of tax-exempt bonds by wealthy individuals in 1936 as “moral fraud.” President Franklin Delano Roosevelt blurred the distinction between evasion and avoidance in his 1937 Message to Congress, warning that “the decency of American morals is involved.” As attorney Randolph Paul described the situation in 1937, “[t]here is an echo of the Crusades in the fight against tax avoidance.”

I'm neither a tax lawyer nor a theologian, but this got me to wondering what the Church taught on the subject. After all, I invest in tax-exempt bonds (well, mutual funds holding such bonds) and so on.

Do we see sill see examples of moral condemnation of tax avoidance from Church leaders even today? In 2013, The Guardian reported that:

Cardinal Brady, the head of Ireland's Catholic church, has urged G8 leaders to make good on their pledge to tackle aggressive tax avoidance at a summit later this month, declaring that "paying a fair share of taxes" is a "moral obligation". ...

But as always when dealing with the mainstream media, check their facts. The letter was actually written by 11 heads of national Catholic Conferences, not just Cardinal Brady, and what it actually said was:

The G8’s attention to tax evasion, trade and transparency is equally timely. The Catechism of the Catholic Church teaches: “Submission to authority and co-responsibility for the common good make it morally obligatory to pay taxes...” (No. 2240). It is a moral obligation for citizens to pay their fair share of taxes for the common good, including the good of poor and vulnerable communities, just as states also have an obligation to provide “a reasonable and fair application of taxes” with “precision and integrity in administering and distributing public resources” (Compendium of the Social Doctrine of the Church, No. 355).

I don't see anything there about tax avoidance.

Turning therefore to the Catechism, # 2409 states:

Even if it does not contradict the provisions of civil law, any form of unjustly taking and keeping the property of others is against the seventh commandment: thus, deliberate retention of goods lent or of objects lost; business fraud; paying unjust wages; forcing up prices by taking advantage of the ignorance or hardship of another.

The following are also morally illicit: speculation in which one contrives to manipulate the price of goods artificially in order to gain an advantage to the detriment of others; corruption in which one influences the judgment of those who must make decisions according to law; appropriation and use for private purposes of the common goods of an enterprise; work poorly done; tax evasion; forgery of checks and invoices; excessive expenses and waste. Willfully damaging private or public property is contrary to the moral law and requires reparation.

Number 2240 further states that “Submission to authority and co-responsibility for the common good make it morally obligatory to pay taxes...” (For an argument that tax evasion is not sinful, at least in some cases, see McGee, Robert W., Is Tax Evasion Unethical?. Policy Analysis Paper No. 11. Available at SSRN: https://ssrn.com/abstract=74420 or http://dx.doi.org/10.2139/ssrn.74420)

But tax evasion is not tax avoidance. Tax evasion is the illegal nonpayment or underpayment of tax. In contrast, as Bank explains, tax avoidance "usually involves employing legal maneuvers, sometimes called 'loopholes,' to reduce the amount a taxpayer owes." Does the Church condemn tax avoidance as it does tax evasion?

At this point, I pause to score a cheap debater's point by observing that the Catholic Church avoids a huge amount of taxes by being a nonprofit organization, ranging from income to property taxes. (According to one estimate, the total value of tax exemptions to all religions is on the order of $71 billion per year.) Indeed, the US Catholic Conference itself argued in a 1970 amicus brief filed with the Supreme Court that allowing the Church to avoid paying taxes by granting them these exemptions "is a great bulwark of the American wall of separation, because it both enhances the fiscal separation of Church and State and avoids the imposition of an extremely substantial burden on the free exercise of religion.” Reka Potgieter Hoff, The Financial Accountability of Churches for Federal Income Tax Purposes: Establishment or Free Exercise?, 11 Va. Tax Rev. 71, 113 (1991)

But back to my research.

There are examples in the Bible of tax avoidance. Before David went out to fight Goliath he asked “How will the man who kills this Philistine and frees Israel from disgrace be rewarded?" (1 Samuel 17:26) He was told "The king will make whoever kills him a very wealthy man. He will give his daughter to him and declare his father’s family exempt from taxes in Israel.” (1 Samuel 17:25) So David had--among other reasons--a tax avoidance incentive for fighting the giant.

The Biblical passages on paying taxes, moreover, seem to say that tax evasion is a sin but no more. Saint Paul told the Romans, for example, that they paid taxes because "the authorities are ministers of God, devoting themselves to this very thing." (Romans 13:6) Hence, he exhorted the Romans: